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Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation's economic pulse, Q1 2021.

The latest ICAEW Business Confidence Monitor (BCM) shows that despite the challenges of 2020, business confidence has returned to positive territory, as news of the vaccine roll-out increases hopes of recovery in 2021.

The results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period between 19 October 2020 and 15 January 2021.

Key points

  • Although output is weak overall, and businesses report the sharpest fall in employment for over a decade, confidence rebounded in the second half of October and has held up since then.
  • This recovered confidence is despite a sharp rise in coronavirus infections and new lockdown restrictions. It seems likely that worries over infection rates have been balanced by positive news about vaccine approvals and distribution.
  • Companies therefore expect to see strong recoveries in sales in 2021, especially in the domestic market, leading to higher employment levels, some recovery in profits, and modest increases in investment.
  • The recoveries will only partially offset the 2020 declines, so sales in 2021 are likely to remain well below pre-pandemic levels. Considerable uncertainty remains, with possible adverse consequences for confidence.
  • Companies are experiencing high levels of inventories and significant spare capacity, with many also facing problems with late payments, the ability to expand into new areas, and transport.
  • The Transport & Storage sector has experienced the greatest sales hit over the past year. It has the highest level of spare capacity and has seen the fastest profits fall. Among other sectors, IT & Communications, and Banking, Finance & Insurance have seen marginal sales increases over the past year. All sectors expect sales to rise.
  • In the South East, domestic sales are already back to where they were a year ago, and the region is the most optimistic about general business conditions. Businesses in the West Midlands have the strongest expectations for domestic sales in 2021, after a very difficult 2020.

GDP

Economic recovery has been interrupted in the UK by a second wave of the pandemic

UK: GDP index

  • Economic output fell very sharply in early 2020, then rebounded, and plateaued at a level below where it was at the very beginning of 2020.
  • These patterns can be largely explained by the further spread of COVID-19 and the containment measures that have been put in place as a result.
  • As vaccines are gradually rolled out, 2021 should see a return to more consistent growth, although clearly this is subject to considerable uncertainty.

As the global COVID-19 pandemic spread in early 2020, GDP declined in all economies around the world. In the UK, it reached a low point in April, at just under 25% below its February level. The hospitality, leisure and culture sectors were the worst affected. The health and public administration sectors saw little change in overall activity levels, but with radical changes to the balance of services being provided.

After April, the UK experienced a GDP recovery, which became rapid in June and July. The pace of growth then moderated markedly, and the latest estimate from the Office for National Statistics shows a fall in output in November, although by much less than in April and with a very modest rebound in December. Major factors driving these movements include changes to the rules regarding social contacts, especially the closure of schools, businesses and other establishments. There has also been a range of government tax and spending measures designed to protect jobs and company finances.

It is also likely that the relatively modest scale of the November GDP decline was partly because many consumers and employers have become more adept at operating in the new, more constrained circumstances than they were in the early weeks of the current crisis. Greater use of online services is an obvious example.

December was a very mixed month when it came to the COVID-19 containment measures, with an initial easing of regulations being subsequently reversed as a new, more contagious, virus strain emerged. In consequence the UK economy ended 2020 with GDP still markedly lower than it was in February. 

It is reasonable to think that 2021 will see GDP recoveries in economies around the world, including in the UK, helped by the roll-out of vaccines. Crucial in that context will be the extent to which governments at home and worldwide continue to provide financial support. The strength of both consumer and business confidence will also be very important.

Confidence overall

Business confidence returns to positive territory with the news of vaccine roll-out

  • Business confidence is back into positive territory.
  • News of the vaccine roll-out is the likely driving force behind this boost in confidence.
  • The rise in confidence is shared across sectors, regions, types and size of business, and companies that do and don’t export.

During the current survey period, which stretched from mid-October 2020 to mid-January 2021, the Business Confidence Index moved quickly from negative to positive territory, where it remained during a period of considerable uncertainty, and indeed confusion.

News of new vaccines becoming available was quickly followed by evidence of a second wave of infections. Tight COVID-19 restrictions in November were followed by a brief period of reprieve, only to be tightened once again. Worries about trade disruptions if no Brexit trade deal could be agreed were followed by the successful conclusion of a deal at the end of December. Early January also saw considerable disruption at the Channel ports, and a growing realisation that many businesses may be hampered by non-tariff trade barriers. In addition, some sectors such as financial services are not covered by the recent trade deal and face continued uncertainty.

The net result is an overall index in positive territory at +10, thanks to its early surge due to the vaccine news, compared with -19 in Q4 2020. This means that confidence that economic conditions in the year ahead will be better than over the past 12 months is now more widespread than at any point since before the Brexit referendum. The positive sentiment is shared by different types of companies across sectors and almost all regions, and by businesses that export as well as those that don’t.  

 

Sales

Sales are expected to grow in 2021, after a very tough 2020

  • Domestic sales fell by 2.2% over the year to Q1 2021 while exports increased marginally by 0.3%. The difference reflects the deeper recession in the UK than in most other advanced economies.
  • The weakness in sales has also impacted employment and profits.
  • Companies expect rises in sales growth over the year ahead, by 5.2% for domestic markets and 3.3% for exports. This will rely on the successful rolling out of vaccines and containment of the pandemic, and on improving consumer as well as business confidence.

Companies in Q1 have experienced a year-on-year decline in domestic sales of 2.2%, very similar to the decline reported in Q4 2020. Employment is also down, although by a little less at -0.9%, while profits are -3.1% lower in the current quarter than a year ago. The furlough scheme has been important in preventing a much sharper decline in employment, and some other government measures have sought to provide a degree of protection to company finances.

Exports have held up a little better than domestic sales, with the year-on-year comparison very mildly positive, at 0.3%. This partly reflects the fact that the UK experienced one of the largest reported GDP declines in 2020 of any advanced economy. In addition, it is likely that there was a surge of export business in the quarter, as companies sought to avoid delays, and potentially tariffs, associated with the UK’s departure from the Single Market at the end of December.

Looking ahead, companies expect growth in sales in 2021, with an expected rise of 5.2% in the case of domestic markets and 3.3% for exports. An important factor here is likely to be the expectation that, during the year, the roll-out of coronavirus vaccines will enable a gradual return to normal business and social behaviour, at home and abroad.

This is clearly subject to considerable uncertainty: partly because the emergence of new virus strains is creating greater health challenges, and partly because there are production and logistical constraints on the speed of vaccine supply (and public uptake).

Business challenges

Businesses facing several growing challenges

  • Late payments continue to be a source of growing difficulties, reflecting pressure on company finances, especially cashflows.
  • The ability to expand into new markets also features prominently, with several factors including travel bans and the UK’s departure from the Single Market likely to be playing roles.
  • Companies also cite transport difficulties as an issue. Shortages in road delivery services following a rise in demand, alongside delays at Channel ports, may be among the reasons for this.

Customer demand and regulatory requirements are the factors that are most widely cited by businesses as increasingly challenging. In the latter case this has, however, fallen compared with a year ago. This may reflect the conclusion of the EU trade talks at the end of December.

For the second quarter running, late payments are widely cited as a growing matter of concern; 32% of companies report them as a rising challenge. This is no doubt a reflection of the pressure placed on company finances, and especially cashflows, by the COVID-19 crisis.

Expanding into new markets is also widely cited as a growing difficulty. Reasons include the impact of travel bans on companies’ ability to engage in sales and marketing activities; Brexit and worries about delays at ports; shortage of management time in a period of very high day-to-day challenges; and the more general impact on demand of the pandemic and the measures that have been taken to curb the spread of infections.

Transport problems are another major challenge; 23% of companies report these as being on the rise. Again, travel bans and delays at ports are likely reasons. Furthermore, the progressive shift towards online commerce and retailing has increased the demand for delivery services, and it is possible that some companies have faced difficulties obtaining these, even though the Transport sector overall has significant spare capacity.

Employment and investment

Employment and investment are down but companies expect rises in the year ahead

  • Employment has fallen at its fastest rate in over a decade. The decline would have been deeper if not for the government’s furlough scheme.
  • But companies expect to increase their headcounts in the year ahead, reflecting their expectation of a rebound in sales performance.
  • Investment rates have been subdued, but companies plan to increase modestly their capital expenditure, and spending on staff development and Research & Development (R&D), over the coming 12 months.

In response to declines in domestic sales and profits, businesses have reduced their employment numbers at a faster rate than in any period since Q3 2010. Of course, the decline in staff numbers (0.9%) over the last year would have been much more severe, if not for the government’s support via the Coronavirus Job Retention Scheme. This has been particularly important for companies in the most vulnerable sectors during the pandemic.

Initially, the furlough scheme was set to end in the summer of 2020 but has been extended to April 2021. That should reduce the risk of large job losses in early 2021. Indeed, companies plan to increase their employee numbers over the year ahead by 1.4%, reflecting their growth projections for sales and profits.

The number of businesses for whom the availability of either non-management or management skills has been growing as a challenge is low by historical standards. This undoubtedly reflects the declines that have taken place in sales and therefore output. As expected, reductions in headcounts have resulted in the largest fall in staff development budgets in over a decade. Spending here is, however, set to rise in the coming 12 months as businesses begin hiring again.

Across other forms of investment, the current quarter’s level of capital spending is broadly unchanged from a year ago, while R&D budgets have increased marginally, by 0.7% compared with Q1 2020. Companies plan to increase both capital and R&D spending over the next 12 months – by 1.9% and 1.2% respectively.

Stock levels

Stock levels remain elevated amid weak demand and Brexit concerns

  • Companies continue to experience high levels of stocks for finished goods, work in progress, and raw materials and components.
  • This substantially reflects the sharp declines in sales over the past year.
  • Concerns over the impending end of the UK’s transitionary period with the EU, and the consequent risk of trade disruption, are almost certainly another factor.

A large proportion of companies are operating below capacity, and many are also operating with high levels of stocks, compared to historical norms. This is particularly the case for finished goods, with over a fifth of companies in the Manufacturing, Construction, and Retail & Wholesale sectors saying that their stock levels are above normal. This will be placing significant pressure on company finances, and especially on cashflow.

A key reason is the widespread weakness in demand across the UK and global economies, due to the coronavirus pandemic, which means that companies have accumulated not just finished products but also raw materials and partially completed items.

The conclusion of the UK’s transitionary period on 31 December for trading with the EU under Single Market terms is likely to have caused many companies to bring forward their purchases of raw materials and components. It is also possible that disruptions at the Channel ports in advance of the deadline meant that some companies had difficulties shipping their products.

It is probable that during 2021, as sales grow and as problems with EU trade diminish, companies will gradually run down their stock levels. That will ease their financial positions, but it will also mean that the growth in output will be slightly weaker than it otherwise would be.

Confidence by sector

Transport and Construction companies are the most optimistic about the year ahead

  • Companies in the Transport & Storage and Construction sectors have suffered the sharpest falls in domestic sales, year-on-year, in Q1 2021. The former also have the most amount of spare capacity.
  • That said, Transport & Storage and Construction are the most optimistic sectors for the year ahead.
  • Sales performance has been most resilient in Banking, Insurance & Finance, and in the IT & Communications Sector.

Across sectors, the sharpest falls in domestic sales in the year to Q1 2021 are in Transport & Storage and Construction. Within the former, the airline industry has been severely damaged during the pandemic, mainly because of government travel restrictions, but also a large fall in passenger confidence. Public transport services such as buses and trains have also been affected, with very large declines in revenues for most operators. Although delivery and logistics companies have seen some increase in demand, nearly two-thirds, 61%, of companies in Transport & Storage report that they are operating below capacity, the highest for any sector.

Meanwhile, the risks associated with coronavirus, and a collapse in demand for property, have forced many Construction companies to delay or pause site work. Further compounding the sector’s troubles have been supply shortages due to the closure of builders’ merchants.

At the other end of the spectrum are Banking, Insurance & Finance, and IT & Communications. These are the only two sectors that report expansions in both domestic sales and exports in the year to Q1 2021. This reflects increased demand, especially for digital services, plus the fact that businesses in these sectors, which rely less on in-person interaction, have been better able than most to transition to home working.

Looking ahead, the Transport & Storage and Construction sectors are the most optimistic that business conditions in the next 12 months will be better than in the 12 months just gone. The Construction sector expects the strongest growth in sales, closely followed by Retail & Wholesale and Transport & Storage. The sector with the weakest confidence is Property. Over half of businesses in the sector, 57%, identify late payments as a rising source of difficulty, the highest rate reported by companies in the sector since the survey began, and nearly double the national average. Many tenants are reluctant, or unable, to pay rents on properties that they are not currently occupying or are asking for discounts to reflect declines in customer demand.

Confidence by region and nation

Widespread improvements in company confidence across regions, led by the South East

  • Positive business confidence is common across almost all regions.
  • Confidence is highest in the South East, the one region to have experienced rising sales over the past year, even if by only a very marginal amount.
  • Companies in the East of England are also noticeably optimistic, while business confidence is weakest in Yorkshire & Humber. The region reports the steepest falls in exports and employee numbers over the 12 months to Q1 2021.
  • Confidence is also subdued in Northern England and Wales. This may reflect concerns over post-Brexit trade prospects. These two areas, along with Yorkshire & Humber, are the most reliant on the EU market for exporting goods.

Businesses in most regions and nations of the UK are showing a rise in confidence. The exception is Yorkshire & Humber, the only region where business confidence is in negative territory, although the decline is very marginal. This follows a steeper fall in exports than anywhere else in the UK. Partly as a result, the region has experienced the largest contraction in employment over the last 12 months.

Confidence is also subdued among companies in Northern England and Wales. It is notable that the three most pessimistic regions in the UK are also the three that are most reliant on the EU market for exporting their goods.

At the other end of the spectrum, companies in the South East are the most confident across the UK about prospects for the next 12 months. The region has seen small but significant resilience over the past year. It is the only one not to report a contraction in domestic sales over the past 12 months, probably reflecting its strength in electronics and the digital economy.

The same sector, along with pharmaceuticals, is likely to have provided support to the East of England, another relatively optimistic part of the UK. Over the past year the region has benefitted from an expansion in exports of 2.6%. That is a considerably faster rate than anywhere else in the UK.

Businesses across all regions expect sales to rebound in the year ahead. The West Midlands has the strongest projections for domestic sales, after being among the hardest hit in the year to Q1 2021. Export growth is also set to rebound most sharply in the West Midlands, with pent-up demand set to drive growth in the region’s large car manufacturing and consumer goods sectors.

Confidence by business size

Confidence highest for listed companies, while exporters more optimistic than non-exporters

  • As with most sectors and regions, confidence across different types of companies has moved into positive territory. Listed UK companies are the most optimistic, possibly reflecting easier access to finance than privately-owned companies, and their greater exposure to the global economy.
  • Among privately-owned companies, Small and Medium Sized Enterprises (SMEs) are marginally more confident than larger businesses, having experienced smaller declines in domestic sales and profits over the past year.
  • Exporting businesses are marginally more confident than those that don’t export.

All types of company, by both size and ownership, have seen their confidence move into positive territory in Q1 2021. Publicly-listed companies are, however, slightly more optimistic than those that are privately owned. This may reflect their easier access to capital, which has allowed several companies to strengthen their balance sheets in 2020. Quoted companies are also more likely to export, and exporters in general are slightly more optimistic than those who sell only into the domestic market.

Sentiment among exporters has possibly been buoyed by the trade deal that was concluded by the UK and EU at the very end of 2020, as well as by hopes of a strong global recovery in 2020. Many Asian economies have already experienced several months of rising GDP. China has reported a higher average level of GDP in 2020 than in 2019.

Among privately-owned companies, a key concern at the onset of the pandemic was whether Small and Medium Sized Enterprises (SMEs) might be especially vulnerable to the downturn in activity. Instead, they experienced a slightly shallower fall in domestic sales and profits in the year to Q1 2021 than larger companies. A smaller proportion of them cite customer demand as a growing issue. The confidence of SMEs about future business conditions is now marginally higher than for large privately-owned businesses.

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Using BCM data

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